----

| /X/ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2011 |
|-----|---------------------------------------------------------------------------------------------------------------------------------|

| / / | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|-----|------------------------------------------------------------------------------------|

|   ILLINOIS                                               |   36-4197173                          |
|---------------------------------------------------------------|--------------------------------------------|
| (State or Other Jurisdiction ofIncorporation or Organization) |   (I.R.S. EmployerIdentification No.) |

----

----

|          |   |            | Q1 2011 |                                               | Q1 2010 |                                               | Q1 2009 |                                                          | Q1 2008 |
|---------------|--------|-----------------|---------|----------------------------------------------------|---------|----------------------------------------------------|---------|---------------------------------------------------------------|---------|
|          |   |            |    |                                               |    |                                               |    |                                                          |    |
| Sales Revenue |   |  $ 247,366 |    |  $      180,251 |    |  $      127,969 |    |  $        66,444 |

----

----

| 1.   | As of March 31, 2011, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees our accounting policies and procedures.  This has resulted in inconsistent practices.   Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As of March 31, 2011, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | As of March 31, 2011, we did not maintain effective controls over financial reporting. Specifically controls were not designed and in place to ensure that the financial impact of certain complex equity and derivative liability transactions were appropriately and correctly reported. The transactions were identified by the auditors and calculated and reported correctly as of March 31, 2011. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 3(i) | Restated Articles of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 3(i) to the Company's Form 10-K filed on April 9, 2010, and incorporated herein by reference). |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(ii) | Bylaws of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the Company’s Form 8-K filed on November 16, 2007, and incorporated herein by reference). |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(iii) | Amendment to Bylaws of Z Trim Holdings, Inc. (filed as Exhibit 3.2 to the Company’s Form 8-K filed on September 23, 2008, and incorporated herein by reference). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

| 4.1 | Specimen Certificate for common stock (filed as Exhibit 3.1 to the Company's Form 10-SB filed on August 21, 2000, and incorporated herein by reference). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Steve Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form 10-QSB for the quarter ending June 20, 2006 and incorporated herein by reference). |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Brian Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit 10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated herein by reference). |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Z Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004 and approved by its Shareholders on that date and incorporated herein by reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1* | Statement Under Oath of Principal Executive Officer of the Company pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 31.2* | Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 32.1* | Statement Under Oath of Principal Executive Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 32.2* | Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                       |   |   |   |   |   |   |   |   |   | PAGE   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010                            |   |   | F-1    |
|                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statements of Operations for three months ended as of March 31, 2011 and 2010 (unaudited)     |   | F-3    |
|                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statements of Cash Flows for the three months ended as of March 31, 2011 and 2010 (unaudited) |   |   | F-4    |
|                                                                                                       |   |   |   |   |   |   |   |   |
| Notes to Consolidated Financial Statements as of March 31, 2011 and 2010 (unaudited)                       |   | F-5    |

----

| Z TRIM HOLDINGS, INC.                                                       |   |                                                                                                                                                               |   |                                                                                                                                                               |
|-----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE SHEETS                                                              |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| ASSETS                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                        |   | (Unaudited)                                                                                                                                                        |   |                                                                                                                                                               |
|                                                                        |   | 3/31/2011                                                                                                                                                          |   | 12/31/2010                                                                                                                                                         |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Current Assets                                                              |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Cash and cash equivalents                                                   |   |  $                 4,159,739                                             |   |  $                 2,327,013                                             |
| Accounts receivable                                                         |   |                         232,895            |   |                         205,409            |
| Inventory                                                                   |   |                           90,905 |   |                           87,108 |
| Prepaid expenses and other assets                                           |   |                           93,623 |   |                           93,181 |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Total current assets                                                        |   |                     4,577,162                                  |   |                     2,712,711                                  |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Long Term Assets                                                            |   |                                                                                                                                                               |   |                                                                                                                                                               |
|         Property and equipment, net |   |                     3,038,307                                  |   |                     2,914,880                                  |
|         Deposit on Fixed Asset      |   |                         141,320            |   |                         137,450            |
| Deposits                                                                    |   |                           15,003 |   |                           15,003 |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Total other assets                                                          |   |                     3,194,630                                  |   |                     3,067,333                                  |
|                                                                        |   |                                                                                                                                                               |   |                                                                                                                                                               |
| TOTAL ASSETS                                                                |   |  $                 7,771,792                                             |   |  $                 5,780,044                                             |

----

| Z TRIM HOLDINGS, INC.                                                                               |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE SHEETS                                                                                      |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| LIABILITIES & CONVERTIBLE, REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT)      |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|                                                                                                |                                                                                                                   | (Unaudited)                                                                                                                                                                                         |                                                                                                                   |                                                                                                                                                                                                                |
|                                                                                                |                                                                                                                   | 3/31/2011                                                                                                                                                                                           |                                                                                                                   | 12/31/2010                                                                                                                                                                                                          |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Current Liabilities                                                                                 |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Accounts payable                                                                                    |                                                                                                                   |  $                    255,914                                                              |                                                                                                                   |  $                    356,567                                                                              |
| Dividends payable                                                                                   |                                                                                                                   |                         171,879                                             |                                                                                                                   |                           66,934                                                  |
| Accrued expenses and other                                                                          |                                                                                                                   |                         486,305                                             |                                                                                                                   |                         790,462                                                             |
| Accrued Liquidated Damages                                                                          |                                                                                                                   |                         111,028                                             |                                                                                                                   |                         111,028                                                             |
|         Derivative Liabilities                              |                                                                                                                   |                   17,016,974                                                                              |                                                                                                                   |                   13,528,355                                                                                              |
|         Convertible Notes Payable, Net                      |                                                                                                                   |                     1,082,252                                                                   |                                                                                                                   |                     3,352,985                                                                                   |
| Total Current Liabilities                                                                           |                                                                                                                   |                   19,124,352                                                                              |                                                                                                                   |                   18,206,331                                                                                              |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Total Liabilities                                                                                   |                                                                                                                   |                   19,124,352                                                                              |                                                                                                                   |                   18,206,331                                                                                              |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Commitment & Contingencies                                                                      |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|   Convertible, Redeemable Preferred Stock                                                 |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|   Preferred Stock Series I, $0.01 par value; authorized 1,000,000 shares;                 |                                                                                                                   |                                                                                                                                                                                                |
|   issued and outstanding 968,858 and 956,858 shares, March 31, 2011                       |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |
|   and December 31, 2010  respectively                                           |                                                                                                                   | 4,844,291                                                                                                                                                                                           |                                                                                                                   | 4,784,291                                                                                                                                                                                                           |
|   Preferred Stock Series II, $0.01 par value; authorized 1,000,000 shares;                |                                                                                                                   |                                                                                                                                                                                                |
|   issued and outstanding 665,339 and 0 shares, March 31, 2011                             |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
|   and December 31, 2010  respectively                                           |                                                                                                                   | 3,326,697                                                                                                                                                                                           |                                                                                                                   |                                    - |
|   Discount on Preferred Stock                                                             |                                                                                                                   | (7,387,729)                                                                                                                                                                                         |                                                                                                                   | (4,457,406)                                                                                                                                                                                                         |
|     Net Preferred Stock                                                         |                                                                                                                   | 783,259                                                                                                                                                                                             |                                                                                                                   | 326,885                                                                                                                                                                                                             |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Total Commitment & Contingencies                                                                |                                                                                                                   | 783,259                                                                                                                                                                                             |                                                                                                                   | 326,885                                                                                                                                                                                                             |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Stockholders' Equity (Deficit)                                                                      |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Common stock, $0.00005 par value; authorized 200,000,000                                            |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| shares; issued and outstanding 12,613,656 and                                                       |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| 8,091,769 shares, March 31, 2011 and December 31, 2010                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| respectively                                                                                        |                                                                                                                   |                                 631 |                                                                                                                   |                                 405                 |
| Additional paid-in capital                                                                          |                                                                                                                   |                   90,939,280                                                                              |                                                                                                                   |                   84,162,726                                                                                              |
| Common Stock Payable                                                                                |                                                                                                                   |                         118,125                                             |                                                                                                                   |                                    - |
| Accumulated deficit                                                                                 |                                                                                                                   |               (103,193,855)                                                                                                   |                                                                                                                   |                 (96,916,303)                                                                                                        |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| Total Stockholders' Equity (Deficit)                                                                |                                                                                                                   |                 (12,135,819)                                                                                        |                                                                                                                   |                 (12,753,172)                                                                                                        |
|                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                                |
| TOTAL LIABILITIES & CONVERTIBLE REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT) |  $                 7,771,792 |                                                                                                                                                                                                |  $                 5,780,044 |

----

| Z TRIM HOLDINGS, INC.                                   |                                                                                                                |   |                                                                                                                                                          |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENTS OF OPERATIONS                                |                                                                                                                |   |                                                                                                                                                          |
|                                                    | (Unaudited)                                                                                                         |   | (Unaudited)                                                                                                                                                   |
| FOR THE THREE MONTHS ENDED MARCH 31,                    | 2011                                                                                                                |   | 2010                                                                                                                                                          |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| REVENUES:                                               |                                                                                                                |   |                                                                                                                                                          |
|   Products                                    |  $           247,366                                    |   |  $           180,251                                                                              |
|     Total revenues                  |                247,366                   |   |                180,251                                                             |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| COST OF REVENUES:                                       |                                                                                                                |   |                                                                                                                                                          |
|   Products                                    |                645,658                   |   |                543,422                                                             |
|     Total cost of revenues          |                645,658                   |   |                543,422                                                             |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| GROSS MARGIN                                            |              (398,292)                             |   |              (363,171)                                                                       |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| OPERATING EXPENSES:                                     |                                                                                                                |   |                                                                                                                                                          |
| Selling, general and administrative                     |    1,793,741                                                                                         |   |    2,258,886                                                                                                                                   |
|     Total operating expenses        |            1,793,741                                         |   |            2,258,886                                                                                   |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| OPERATING LOSS                                          |           (2,192,033)                                             |   |           (2,622,057)                                                                                       |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| OTHER INCOME (EXPENSES):                                |                                                                                                                |   |                                                                                                                                                          |
| Rental and other income                                 |                216                       |   |                  40                                                      |
| Interest income                                         |            1,344                                             |   |                670                                                                 |
| Interest expense - Note Payable                         |   (1,826,662)                                                                                             |   |   (1,139,973)                                                                                                                                       |
| Liquidated Damages                                      |                   -       |   |        (20,025)                                                                                                            |
| Change in Fair Value - Derivative                       |   (1,836,765)                                                                                             |   |    3,358,893                                                                                                                                   |
| Loss on Derivative Settlement                           |      (411,192)                                                                             |   |      (320,294)                                                                                                                       |
| Loss on Conversion of Note Payable                      |                   -       |   |           (5,634)                                                                                           |
| Settlement (loss) gain                                  | (12,460)                                                                                                            |   |                           - |
|     Total other income (expenses)   |           (4,085,519)                                             |   |            1,873,677                                                                                   |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| NET LOSS                                                |  $      (6,277,552)                                                              |   |  $          (748,380)                                                                                  |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| Preferred Dividends Payable                             |                171,849                   |   |                   -                                                 |
| Accretion of Discount of Preferred Stock                |                456,374                   |   |                   -                                                 |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| NET LOSS  ATTRIBUTABLE TO COMMON STOCKHOLDERS |  $      (6,905,775)                                                              |   |  $          (748,380)                                                                                  |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| NET LOSS PER SHARE - BASIC AND DILUTED                  |  $                 (0.83) |   |  $                 (0.22)                                           |
|                                                    |                                                                                                                |   |                                                                                                                                                          |
| Weighted Average Number of Shares Basic and Diluted     |               8,314,026                       |   |            3,363,577                                                                                   |

----

| Z TRIM HOLDINGS, INC.                                                                                      |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
|------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENTS OF CASH FLOWS                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
|                                                                                                       | (Unaudited)                                                                                                                                                                                             |   | (Unaudited)                                                                                                                                                                                                   |
| FOR THE THREE MONTHS ENDED MARCH 31                                                                        | 2011                                                                                                                                                                                                    |   | 2010                                                                                                                                                                                                          |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Net loss                                                                                                   |                   (6,277,552)                                                                                 |   |                      (748,380)                                                                       |
| Adjustments to reconcile loss from continuing operations to                                                |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| net cash used in operating activities:                                                                     |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Stock based compensation                                                                                   | 715,410                                                                                                                                                                                                 |   |                        684,434                                                             |
| Shares issued for director fees                                                                            | 201,400                                                                                                                                                                                                 |   | 234,000                                                                                                                                                                                                       |
| Shares & Warrants issued for Services                                                                  | 118,125                                                                                                                                                                                                 |   |                        490,000                                                             |
| Interest Charge on BCF                                                                                     |                     1,593,767                                                                       |   | 811,058                                                                                                                                                                                                       |
| Depreciation                                                                                               | 164,945                                                                                                                                                                                                 |   |                        200,047                                                             |
| Loan Cost Amortization                                                                                     |                                  - |   |                        144,363                                                             |
| Interest on conversion of NP                                                                               |                                  - |   |                            5,634                                       |
| Change in  Derivative Liability, net of bifurcation                                              |                     2,247,957                                                                       |   |                   (3,038,599)                                                                                       |
| Changes in operating assets and liabilities:                                                               |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Accounts receivable                                                                                        | (27,486)                                                                                                                                                                                                |   |                        (14,396)                                                            |
| Inventory                                                                                                  | (3,797)                                                                                                                                                                                                 |   |                          (3,947)                                                 |
| Prepaid expenses and other assets                                                                          | (442)                                                                                                                                                                                                   |   |                        (19,078)                                                            |
| Increase/(Decrease) in:                                                                                    |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Accounts payable and accrued expenses                                                                      | 213,219                                                                                                                                                                                                 |   |                        127,724                                                             |
| Accrued Liquidated Damages                                                                                 |                                  - |   |                          20,025                                                  |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH USED FOR OPERATING ACTIVITIES                                                                         |                   (1,054,454)                                                                                 |   |                   (1,107,115)                                                                                       |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Purchase of Fixed Assets                                                                                   |                      (292,242)                                                                 |   |                      (261,634)                                                                       |
| CASH USED FOR INVESTING ACTIVITIES                                                                         |                      (292,242)                                                                 |   |                      (261,634)                                                                       |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH FLOWS FROM FINANCING ACTIVITES                                                                        |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Proceeds from sale of preferred stock                                                                      |                     3,326,697                                                                       |   |                                  -       |
| Proceeds from sale of common stock                                                                         |                            2,725                                 |   |                            3,731                                       |
| Borrowing on debt                                                                                          |                                  - |   |                     1,596,000                                                                             |
| Principal payment on debt                                                                                  |                      (150,000)                                                                 |   |                                  -       |
| Proceeds from sale of stock                                                                                |                                                                                                                                                                                                    |   |                            9,000                                       |
| CASH PROVIDED BY FINANCING ACTIVITIES                                                                      |                     3,179,422                                                                       |   |                     1,608,731                                                                             |
| NET (DECREASE)INCREASE IN CASH                                                                             |                     1,832,726                                                                       |   |                        239,982                                                             |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH AT BEGINNING OF PERIOD                                                                                |                     2,327,013                                                                       |   |                        324,784                                                             |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| CASH AT THE PERIOD ENDED MARCH 31                                                                          |                     4,159,739                                                                       |   |                        564,766                                                             |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
| Supplemental Disclosures of Cash Flow Information:                                                         |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |
|         Cash less exercise of warrants                             |                                  - |   |                                   9 |
|         Note Payable conversion                                    |                     4,332,529                                                                       |   |                          20,762                                                  |
|         Discount on convertible debentures                         |                                  - |   |                     1,596,000                                                                             |
|         Discount on preferred stock                                |                     3,386,697                                                                       |   |                                  -       |
|         Amortization on preferred stock                            |                        456,374                                                       |   |                                  -       |
|         Change in derivative liability due to exercise of warrants |                          26,842                                            |   |                        354,292                                                             |
|         Change in derivative liability due to conversion of NP     |                     2,119,193                                                                       |   |                                  -       |
|         Dividends Payable                                          |                        104,945                                                       |   |                                  -       |
|                                                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                          |

----

----

| ·   | Level one — Quoted market prices in active markets for identical assets or liabilities; |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | Level two — Inputs other than level one inputs that are either directly or indirectly observable; and |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                        | 3/31/2011                                                                                                           |   | 12/31/2010                                                                                                          |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| Raw materials               |  $      38,143                                                                   |   |  $      24,020                                                                   |
| Packaging                   |             7,187                                       |   |             2,764                                       |
| Work-in-process             |          15,530                                                        |   |             7,584                                       |
| Finished goods              |          30,045                                                        |   |          52,740                                                        |
| Other Inventory             |                    - |   |                    - |
|   Total inventory |  $      90,905                                                                   |   |  $      87,108                                                                   |

|                                        |   |         |   |         |
|---------------------------------------------|--------|--------------|--------|--------------|
|                                        |   | 3/31/2011    |   | 12/31/2010   |
| Production, engineering and other equipment |   | $5,751,832   |   | $5,751,832   |
| Leasehold improvements                      |   | 2,901,002    |   | 2,901,002    |
| Office equipment and furniture              |   | 577,226      |   | 577,226      |
| Computer equipment and related software     |   | 129,899      |   | 140,246      |
| Construction in process - Equipment         |   | 288,373      |   | 0            |
|                                        |   | $9,648,332   |   | $9,370,306   |
| Accumulated depreciation                    |   | ($6,610,025) |   | ($6,455,426) |
| Property and equipment, net                 |   | $3,038,307   |   | $2,914,880   |

| Depreciation expense was $164,945 and $200,047 for the three months ended March 31, 2011 and March 31, 2010 respectively. |
|--------------------------------------------------------------------------------------------------------------------------------|
| During the three months ended March 31, 2011 and 2010, no equipment was sold.                                                  |

|                               | 3/31/2011                                                                                                              |   | 12/31/2010                                                                   |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
| Accrued legal                      |  $                  623 |   |  $           670 |
| Accrued payroll and taxes          |                 14,398                 |   |            5,373      |
| Accrued Settlements                |               125,000                            |   |          78,140                 |
| Accrued Interest                   |               219,278                            |   |        604,412                            |
| Accrued expenses and other         |               127,006                            |   |        101,867                            |
| Total accrued expenses & other |  $           486,305                                       |   |  $    790,462                                       |

----

----

----

|                                                      | March 31, 2011 |       | December 31, 2010 |
|-----------------------------------------------------------|----------------|------------|-------------------|
|                                                      |           |       |              |   |   |
| Common stock warrants                                     |           | 12,840,070 |              |   | 9,041,049 |
| Embedded conversion features –part of note discount |           | 4,176,904  |              |   | 4,487,306 |
|                                                      |           |       |              |   |   |
| Total                                                     | $              | 17,016,974 |              | $ | 13,528,355 |

|                                      |                    March  31, 2011 |                      December 31, 2010 |
|-------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| Beginning Balance                         | 13,528,355                                                                                                                        |                                                                                                                                       | 10,285,578 |
| Bifurcated Amount                         | 3,386,697                                                                                                                         |                                                                                                                                       |   6,560,569 |
| Change in Derivative Liability            | 2,247,957                                                                                                                         |                                                                                                                                       | (1,927,911) |
| Change in Derivative Liability-Conversion | (2,146,035)                                                                                                                       |                                                                                                                                       | (1,389,881) |
| Total                                     | $         17,016,974                                                                 |                                                                                                                                       | $     13,528,355 |

----

|                             |   | 3/31/2011                                                                                                                 |                                                                                               |   | 12/31/2010                                                                                                                |                                                                                               |
|----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                             |   |                                                                                                                      | Weghted                                                                                            |   |                                                                                                                      | Weghted                                                                                            |
|                             |   | Number                                                                                                                    | Average                                                                                            |   | Number                                                                                                                    | Average                                                                                            |
|                             |   | of                                                                                                                        | Exercise                                                                                           |   | of                                                                                                                        | Exercise                                                                                           |
|                             |   | Shares                                                                                                                    | Price                                                                                              |   | Shares                                                                                                                    | Price                                                                                              |
| Outstanding at beginning of year |   |      3,484,833                                                                                   |  $           1.26                      |   |      1,405,062                                                                                   |  $           0.66                      |
| Granted                          |   |      1,918,702                                                                                   |  $           1.02                      |   |      3,767,500                                                                                   |  $           1.21                      |
| Exercised                        |   |                     - |  $               - |   |                     - |  $               - |
| Expired and Cancelled            |   |       (100,000)                                                                             |  $           1.25                      |   |    (1,687,729)                                                                                             |  $           2.18                      |
| Outstanding at end of period     |   |      5,303,535                                                                                   |  $           1.18                      |   |      3,484,833                                                                                   |  $           0.52                      |
|                             |   |                                                                                                                      |                                                                                               |   |                                                                                                                      |                                                                                               |
| Exercisable at end of period     |   |      3,990,509                                                                                   |  $           1.25                      |   |      3,401,333                                                                                   |  $           1.29                      |

----

|                                           | 3/31/2011                                                                                                                                             |   | 2010                                                                                                                                                  |
|------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| Weighted average fair value per option granted |  $                       0.96 |   |  $                       0.93 |
| Risk-free interest rate                        | 0.60%                                                                                                                                                 |   | 0.87%                                                                                                                                                 |
| Expected dividend yield                        | 0.00%                                                                                                                                                 |   | 0.00%                                                                                                                                                 |
| Expected lives                                 |  1 - 2.5                                                                                                                                         |   |  1 - 2.5                                                                                                                                         |
| Expected volatility                            | 245.92%                                                                                                                                               |   | 185.39 - 191.63%                                                                                                                                      |

|             |   |                                                                                                                    |   | Weighted                                                                                      |   |                                                             |   |                                                                                                                    |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                    |   | Average                                                                                       |   | Weighted                                                         |   |                                                                                                                    |
| Range of         |   |                                                                                                                    |   | Remaining                                                                                     |   | Average                                                          |   |                                                                                                                    |
| Exercise         |   | Options                                                                                                                 |   | Contractual                                                                                   |   | Exercise                                                         |   | Options                                                                                                                 |
| Prices           |   | Outstanding                                                                                                             |   | Life                                                                                          |   | Price                                                            |   | Exercisable                                                                                                             |
| $0.01-$1.50      |   |             5,085,202                                       |   |                4.3 |   |  $       1.11            |   |             3,757,176                                       |
| $1.51-$3.00      |   |                210,000                       |   |                3.8 |   |  $       1.59            |   |                225,000                       |
| $3.01 & over |   |                    8,333 |   |                0.1 |   |  $     40.80                       |   |                    8,333 |
|             |   |             5,303,535                                       |   |                4.3 |   |           1.19 |   |             3,990,509                                       |

|                             |   | Year  Ended                                                                                                                 |                            |             |                            | Year  Ended                                           |   |   |
|----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|------------------|---------------------------------|-----------------------------------------------------------------|--------|--------|
|                             |   | 3/31/2011                                                                                                                             |                            |             |                            | 12/31/2010                                                      |   |   |
|                             |   | Number of Shares                                                                                                                      | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price |
| Outstanding at beginning of year |   |      18,779,753                                                                                              |                            | $1.59            |                            |        9,682,380             |   | $1.61  |
| Granted                          |   |        5,080,046                                                                                   |                            | $1.66            |                            |        9,900,437             |   | $1.50  |
| Exercised                        |   |            (49,358)                                                            |                            | $0.06            |                            |          (108,172) |   | $0.16  |
| Cashless                         |   |                       - |                            |             |                            |          (344,892) |   | $0.19  |
| Expired and Cancelled            |   |          (110,535)                                                                       |                            | $3.69            |                            |          (350,000) |   | $1.10  |
|                             |   |      23,699,906                                                                                              |                            |             |                            |      18,779,753                        |   |   |
|                             |   |                                                                                                                                  |                            |             |                            |                                                            |   |   |
| Outstanding, end of period       |   |      23,699,906                                                                                              |                            | $1.55            |                            |      18,779,753                        |   | $1.59  |
|                             |   |                                                                                                                                  |                            |             |                            |                                                            |   |   |
| Unexercisable at end of period   |   |                                                                                                                                  |                            |             |                            |                                                            |   |   |
| Exercisable at end of period     |   |      23,699,906                                                                                              |                            | $1.55            |                            |      18,779,753                        |   | $1.59  |

----

|   Year Ended | Rentals                                                                                                                                                             |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2011              |                   189,000                                                 |
| 2012              |                     63,000                                      |
| 2013              |                            - |
| 2014              |                            - |
| 2015              |                            - |
|              |  $               252,000                                                            |